The federal government is proposing new guidelines which will again make it more difficult to secure a mortgage. These guidelines expected to be issued in the fall will come into effect shortly after being issued. Rather than tell you about them after the fact we will elaborate on the proposed changes in the event you are thinking of purchasing a home or refinancing your home in the next few months. These proposed changes will seriously impact the amount of a mortgage you will qualify for.
The new changes will affect you if you are purchasing and have a down payment greater than 20 per cent or if you are refinancing and have 20 per cent or more equity in your home. With the recent increase in property values in Kelowna many of you may now have more than 20 per cent equity in your home and may not even be aware of that. With the new changes mortgages secured with at least 20 per cent down payment or 20 per cent equity will be subject to the same stress test that was introduced last fall for hi ratio (mortgages with less than 20 per cent down payment). You will be required to show you can withstand an increase on your mortgage rate of two per cent. Let’s say the rate you are being offered is three per cent – you will be required to qualify for a payment based on five per cent. This applies to fixed and variable rate mortgages regardless of the term you opt for.
Let’s put it into perspective: If you have an annual (or combined annual) income of $75,000 using a property valued at $600,000 as an example, prior to the new rules you would qualify to carry a mortgage of $480,000 with a monthly payment of 2018.89 (based on three per cent rate) When the new rules come into effect you will then be required to qualify for your $480,000 mortgage at a rate of five per cent and prove you will qualify to make a payment amount of $2,561.72 when your actual payment is only $2018.89. Based on your $75,000 income you will not qualify. The amount of a mortgage you will then qualify using the stress test will be substantially reduced to $380,000 or lower depending on property taxes which also play a factor in qualifying. In the scenario above keeping with your $120,000 down payment you will now only qualify to purchase a home for $500,000; $100,000.00 less.
As previously stated this stress test was put in place last fall for mortgages with a down payment of 20 per cent or less. These mortgages require mortgage insurance and CMHC say the new regulations decreased the size of the country’s insured mortgage market by about 33 per cent year over year to June 30/2017.
To add insult to injury the Bank of Canada is very serious about another rate increase and speculation is the increase could come as early as September but more likely in October. Coupling that with the new stress test and the high cost of a home today many will struggle to attain home ownership going forward.
Feedback with regard to the proposed changes can be sent via email to B.20@osfi-bsif.bc.ca
The tougher rules and qualification standards are creating a lot of confusion and misunderstanding out there. There has never been a time more when the average consumer really needs the clarity that a mortgage professional can provide. The majority of you still head to your bank but more and more people are turning to mortgage brokers because with the new rules a broker is in a much better position to offer you so many more options.
Of Prime Interest is collaboration of mortgage professionals: Trish Balaberde: 250-470-8324 trishb@creativemortgage.ca; Darwyn Sloat: 250-718-4117 dsloat@creativemortgage.ca; Christine Hawkins: 250-826-2001 christine@creativemortgage.ca.
